Wise Money: Municipal bond funds not for everyone

Q: In light of the city of Harrisburg's recent default on bond payments, is investing in municipal bonds a good idea?

A: Harrisburg's skipping payments certainly isn't a good sign for investors who hold individual bonds. Yet those who may have minimal exposure to them -- by investing in municipal bond funds -- wouldn't be significantly affected because these funds spread out the risks of default over the bond issues of many cities.

Typically, you have to invest at least $500,000 directly in numerous municipal bonds to achieve competitive pricing and the safety -- provided by diversification -- of a low-cost municipal bond fund. Yet these funds aren't simple investments. Before investing, sit down with your financial adviser to determine whether they're right for your portfolio and your tax scenario. Be sure to seek out no-load (low-cost), high-quality funds.

Q: I'm having trouble making my mortgage payments. The bank keeps calling, but I'm afraid to answer. What should I do?

A: Don't put your head in the sand. Instead, be proactive. You'll be amazed at how willing and eager your mortgage lender will be to work with you because they want to make every effort to keep you on track. It's in their interest to help you find a way to keep your home because they don't want to be stuck with it in a slow market. One option is for lenders to renegotiate the terms of your loan.

Q: I'm considering using a 529 plan to save for my child's college education. How do these plans work, and what should I look for in choosing one?

A: 529 plans are savings vehicles that offer tax incentives to put away money for education expenses. They are offered by individual states, provided through financial institutions such as fund companies. You don't have to live in the state whose plan you participate in. You can choose from different funds, and the choices should depend, in part, on the length of time before you will need the funds.

For example, if your child is 8 years old or younger, you may want a fund weighted with more money in stocks than bonds because stocks pose more risk -- risk that can result in temporary downturns that only long periods can make up for. If your child is 16, you might want these assets weighted in shorter-term bonds because their returns are more stable and predictable. So having the option of determining these weightings is essential.

Look for plans that have very low costs and expenses. Utah's and West Virginia's plans are ranked highly in this regard, and Pennsylvania's has improved from its association with the Vanguard Group. For more information on 529 plans, see www.savingforcollege.com.

Q: This economy has been hard on us. We're having trouble saving any money. What should we do?

A: If you don't already have a budget, putting one together is a good first step. Next, examine your spending, looking for ways to cut back. Do you really need all those cable television channels or unlimited texting? The only method of saving that consistently works is paying yourself first out of each paycheck by using payroll deduction, a checking account draft or some other kind of automatic function. When you do this, you don't ever see this money. It's only human nature to want to spend money if you have it. This way, you don't.

Q: I'm retired and live on a fixed income. I'm concerned that I won't have enough money to keep up with inflation and get through retirement. How can I allocate assets to prevent this now that Social Security isn't being increased for the second year in a row?

A: One way to protect yourself is to keep the money you'll need over the next five to 10 years in short-term investments that have fairly predictable yields: TIPS (Treasury inflation-protected securities), certificates of deposit, short-term investment-grade bonds and money markets. The rest can go in what I like to call an oak-tree account: globally diversified stock index funds, fixed-income investments or both. When the oak tree assets suffer temporary declines, you won't have to liquidate them to pay expenses because you'll have predictable income from your short-term investments.

In today's environment, beware of investment salespeople who talk of high yields. This is code for "high risk." This is the carrot they dangle. Remember, you can never separate high yield from high risk.

Tim Decker is president of ISI Financial Group Inc., a 25-year-old global financial planning firm based in Lancaster. He is the author of "The Sleep-Well-At-Night Investor" and has a radio program, "Financial Freedom," that airs at 1 p. m. Saturdays on WHP-AM 580.